Future is hazy for Kmart, Amazon

DAVID LAZARUS

Published
4:00 am PST, Wednesday, January 23, 2002

It's awfully tempting to look at Amazon.com's first-ever profit and Kmart's bankruptcy yesterday and reach for some profound (yet deeply ironic) conclusion about dot-coms having the last laugh over the brick-and-mortar set.

But that would be dead wrong.

Yes, Amazon finally has some honestly earned cash in its pockets -- took 'em long enough -- and, yes, Kmart has collapsed in the biggest retail bankruptcy ever. Look closer, though, and you see that neither company's fate is clear.

Take Amazon. The leading online retailer posted net profit of $5 million. It didn't even have to resort to the usual accounting trickery that allows money-bleeding companies to pretend they're actually solvent as long as you look past all that red ink.

"There are two types of retailers: those that work hard to raise prices and those that work hard to lower prices," Jeff Bezos, Amazon's head honcho and cheerleader in chief, said in a statement. "Though both models can be successful, we've decided to relentlessly follow the second model."

OK, cool. Except that the lower-your-prices model depends entirely on massive and increasing sales volume, and Amazon's sales growth isn't exactly stratospheric. Quarterly sales rose 15 percent at the end of 2001, thanks primarily to a seasonal bump from the holidays.

The harsh reality is that Amazon still expects to lose as much as $16 million in the current quarter and doesn't see net sales growing more than 10 percent for all of 2002.

The company has indeed cut expenses and streamlined operations, as Bezos promised Wall Street he'd do months ago. But it still has to swallow shipping costs on many orders to lure customers into buying.

Then there's the nagging matter of the moratorium on Internet sales taxes, still in effect but probably not for too much longer. Charging customers a sales tax would certainly put a crimp in Amazon's cut-rate business model.

Now look at Kmart. This has been a disaster-in-waiting for weeks as the second-biggest discount retailer struggled to regain its footing after a bruising and ultimately futile price war with industry big-boy Wal-Mart.

Kmart's Chapter 11 filing came a day after the company's biggest food distributor, Fleming Cos., cut off shipments when Kmart missed a regular weekly payment.

Nevertheless, Kmart promptly secured $2 billion in additional financing to pay its outstanding bills and said it expects to emerge from bankruptcy leaner,

meaner and with all its affairs in order about a year from today.

"We are determined to complete our reorganization as quickly and smoothly as possible while taking full advantage of this chance to make a fresh start and reposition Kmart for the future," the company's chief executive, Charles Conaway, said in a statement.

Kmart is expected to close hundreds of outlets nationwide -- it already shuttered 350 stores last year -- and to slash $350 million in annual expenses,

in part through layoffs.

But nobody expects the company to go belly up. "There's a lot of life left in Kmart," said Helen Bulwik, a principal at retail-industry consultant Seagate International in Oakland.

"Chapter 11 will give Kmart an opportunity to close unprofitable stores, which they have to do," she said. "It's an opportunity for them to clean house. "

Kmart still can still boast of about $37 billion in annual revenue -- a heck of a foundation on which to build a new lease on life.

Amazon, on the other hand, saw $1.12 billion in sales in the most recent quarter, which is a relatively hefty sum for just $5 million in profit.

Amazon also is saddled with more than $2 billion in debt. Since going public in 1997, the company has lost nearly $3 billion on total sales of about $8.3 billion.

Nice business model.

Kurt Barnard, head of Barnard's Retail Consulting Group in New Jersey, said Kmart's survival is assured as long as the company can carve out a corporate identity that distinguishes it in the eyes of consumers from the likes of Wal- Mart and Target.

As for Amazon's longevity, he said, "That's not a sure thing."

"But, you know, if Kmart were to go under, that would have a huge impact on the U.S. economy," Barnard observed. "It would affect many, many other companies. With Amazon, it could go away and hardly anyone would even notice."

Well, investors might. As of yesterday, Kmart had a market value of just $344 million, while Amazon's market value was a whopping $4.7 billion.

In that sense, if in no other, the dot-coms are indeed getting the last laugh.

PROGRAMMING NOTE: My profile of porn-star-turned-businesswoman Kayla Kleevage, advertised in yesterday's paper, was, of course, overtaken by current events. It will run Friday. I hope.